Ireland's cost of borrowing hit 9.21pc yesterday, the highest since the creation of the euro.
It came after news that investors holding Irish bonds face punitive costs to do business through key market player LCH Clearnet.
Yields on the cost of Spanish and Portuguese bonds also widened.
Clearing house LCH Clearnet demanded a 48pc cash deposit for deals involving Irish bonds.
These houses act as middle-men when investors trade bonds between them. LCH Clearnet holds a cash deposit while bond deals are in place to protect it from losses if deals go wrong. The standard deposit for deals involving government bonds is 3pc.
LCH Clearnet is the second biggest clearing house in the world. The increase in the deposit requirement means holders of Irish bonds are essentially being frozen out of the clearing system.
In the past month, the margin, or deposit, LCH Clearnet has demanded on Irish bond deals has been raised three times; from 3pc to 15pc then 30pc and now 45pc. The latest increase means the company would rather not see Irish government debt involved in its operations.
LCH Clearnet said it took the decision based on the difference between the yield on Irish and German bonds -- a measure of risk.
It said the additional margin will be charged on deals in place at the end of trading last night and is due to be paid today. It left bondholders scrambling to unwind trades and drove a sell off of Irish bonds.
Spain's cost of borrowing over 10-years hit 5.21pc and Portuguese yields stood at 7.12pc.
Unlike Ireland and Portugal, Spain still plans to raise money from the international markets this year. It plans to sell €8bn of three-year and 15-year debt in December.